David Korn, who authors a weekly newsletter commentary and summary of Bob Brinker's Moneytalk, wrote the following review of the Niall Ferguson interview. David wrote all editorial comments. (Posted with David's permission.)
[David Korn's Stock Market Commentary, Interpretation of Moneytalk (Bob Brinker Host), Financial Education, Helpful Links, Guest Editorials, and Special Alert E-Mail Service. Copyright David Korn, L.L.C. 2009]"On Sunday, Bob had on Neil Ferguson, author of "The Assent of Money: A Financial History of the Word." Mr. Ferguson is Laurence A. Tisch Professor of History at Harvard University and William Ziegler Professor of Business Administration at Harvard Business School. He is also a Senior Research Fellow at Jesus College, Oxford University, and a Senior Fellow at the Hoover Institution, Stanford University. In other words, he is a pretty smart dude. He was a guest on Moneytalk on December 8, 2008 during which he gave an extensive interview that I covered. ....
PBS has made a two-hour documentary based on Niall Ferguson's book, "The Assent of Money: A Financial History of the World." The film is written and presented by Niall Ferguson. It has been made into a four-part series, the second part of which will be shown Wednesday night. I HIGHLY recommend this......
Here are the important points he made with Bob and with the caller:
Bob asked Niall to comment on how the Obama administration is doing from a financial standpoint. Niall said the first part of that answer goes not to Obama, but to the Federal Reserve and Niall said he thinks Ben Bernanke has done a good job trying to avoid the problems that occurred following the Great Depression where he thinks the collapse of the banks was the major culprit. The Fed has been doing a heroic job trying to keep things together.
The other side of the equation is the Treasury Department which inherited a huge deficit going into the Obama administration which has only grown since. We are now looking at a fiscal deficit that could account for 13-14% of our gross domestic product. We haven't seen that kind of figure since World War II. Is this sustainable, or even a justifiable under Keynesian economic theory. Niall said he thinks this is problematic because it is not just a cyclical response to an economic problem but instead represents the fundamental crises of the US which is to run trillions in deficits for many years. Niall thinks there is a growing tension between the monetary policy the Fed has adopted and this enormously large deficit that is coming from the Treasury. The scale of the deficit is awakening fears of inflation as represented in higher yields on the long end of the Treasury curve and higher mortgage rates. Short term, we are clearly in a deflationary period. But investors are looking ahead not just 1-3 years, but 10 years and believe that this will surely produce inflation down the road.
Bob said he thinks it is important for listeners to contemplate a financial Armageddon scenario where a Fed Chairman was appointed by Obama (Ben Bernanke's term ends in January without reappointment) who adopted a policy of inflation whereby they decide to pay back this debt with inflated dollars. Niall said that is a very risky strategy because over the last few years our country has become more reliant on foreign countries to service our debt. China alone has more than a trillion of dollar denominated bonds in their international reserves. For months, we have heard grumblings from China about the long-term future of the dollar as a reserve currency. This is a troubling sign because if the US lost its credibility of the number one issuer of the currency and most dependable bonds in the world, then very quickly the cost of servicing the debt could rise. This could happen so fast, and it wouldn't take more than a 100 basis points (1%) to be have significant consequences. Niall said he did a very rough calculation and a 100 basis point rise would equate to interest on our debt constituting 20% of all our spending. That is an Armageddon scenario if we lose that perception among the world of our credit worthiness. Niall said he thinks Ben Bernanke is acutely aware of this issue and sending signals about his opposition to a second stimulus and getting our financial house in order. A replacement for Ben Bernanke of a different mindset could send the markets into a tizzy.
EC: That's serious stuff. And it worries me a lot.
Caller: This caller heard that only a quarter of the stimulus money has been handed out, some states haven't got their money yet and some banks have paid off what they got. Why would we need another stimulus when the first isn't even completed? Niall said he finds it baffling that prominent people are calling for more stimulus packages. The first efforts of the stimulus package shows that there is almost complete lack of cooperation between the federal and state governments and the fact that much of the stimulus is not immediate shovel-ready projects. This is contrast to how China is producing immediate employment with their stimulus package. Given the vulnerability of our current economic status, another stimulus package could put us at the tipping point. Niall took a shot at NY Times Columnist Paul Krugman who Niall said can't seem to get enough stimulus!
Niall said there is a major contradiction between fiscal policies at the federal and state level. If a state gets their deficits anywhere above 1% of state domestic product, they have to raise taxes. That is a recipe for a policy mismatch of epic proportions. When you look at California, you have to wonder if other countries will think we are running a complete dysfunctional government. Niall said California is an extreme case. The way their laws work is that it guarantees deficits since cuts can't get done. But it also represents an American problem as evidenced in the way the stimulus package went through Congress. It was quickly high-jacked by special interests and turned into a pork-barrel bill instead of an immediate stimulus. Niall said he is really disturbed by the way our Congress operates now. There is a constituency for spending projects and there is a constituency for cutting taxes, but there is virtually no constituency for a balanced budget or for long term fiscal responsibility. That means we are on a collision course with the markets where foreign and even American investors determine that this isn't sustainable -- especially when you take into account the unfunded liabilities of social security and Medicare. This is part a consequence of a broken political system.
EC: I think I'll leave this EC blank cause I am kind of stunned into
reality. Kind of like the tomb of the unknown EC.
Caller: This caller read the book, "The Lords of Finance" and asked Niall whether he thought we would have a return to the gold standard. Niall said although gold is a better store of value than the dollar bill, to get the gold standard up and running again would be very difficult. The gold system pegged the monetary system to the gold reserves of the central banks of the world but only works for short periods. It became a global system in the 1870s, broke down in World War I, was restored in the mid-1920s, and then broke down in 1931. The lesson is if you try to chain to peg the world's monetary system to gold, you run the risk of significant deflationary crises. It would be unwise to try and resuscitate the gold standard. Niall doesn't think it is a bad idea to have some of your portfolio in gold, but doesn't think it should be the monetary system currency.
Caller: What do you think the true rate of inflation is and has been the last few years? Niall said if the government had maintained its same standards for measuring inflation from the past, then measured inflation would have been considerably higher in recent years than the official headline rate. That led to an underestimate of the inflationary pressures in 2002-2004 when Niall said he thinks the Fed made the mistake of not raising rates and letting the housing bubble go unchecked. We have become doubtful of certain statistics and that can have a big impact on monetary policy. Niall said the rental equivalency figure is problematic in the inflation figures because of how important housing is in an overall budget. In 2002-2004 when the Fed Funds rate was effectively 1%, house prices were increasing at an annual rate of 15%. The peak of house price inflation is close to 20% and that was not being captured in the inflation data and monetary policy makers were simply ignoring it. If you think back to 2002-2004, there was more concern about deflation at the Fed than inflation and that was completely misplaced.
Niall said historians will probably look back and say that the Fed got its theoretical framework wrong when they elected to not include asset prices, whether stock or real estate, in framing policy. That got us into part of the mess we are in. Bob asked him if he was making an implicit criticism of Alan Greenspan. Niall said there was generally a consensus view among the top economists of this framework, and Greenspan probably just went along with it. There was very little dissension on this point.
Caller: A caller pointed out that the biggest balance sheet in the world is the aggregate of the US household which has declined enormously in the last two years. Niall said all the talk about "green shoots" and recovery at this point is completely premature. The magnitude of this crises bears comparison to the depression and no ordinary post-war recession. Whether you look at household balance sheets or the employment numbers the news is only going to get worse. There is no likelihood toward improvement until earlier next year.
Bob said the employment numbers are lagging figures and he doesn't know anyone predicting a 2009 turnaround in housing or employment. Niall said given that, it is hard to imagine how the banks can turn it around this year.
EC: Interesting. Bob is pretty bullish on the stock market, presumably
based on the market anticipating recovery 6 months out.
EC: I think this guy has great insights and ability to communicate
extremely well. Great interview, even though short!"
Honeybee here: For a free issue of David Korn's outstanding newsletter, please go to this [LINK]. From there, you can also VIEW the January 2009 issue of the Retirement Advisor, edited by Kirk Lindstrom and David Korn. It is a superior fixed-income newsletter with an outstanding performance record last year that trounced the newsletter published by Bob Brinker's son.
"The Ascent of Money" is currently playing on PBS. It is also available at the PBS website. [LINK]
I posted a copy of David's summary of Ferguson's December interview on December 12, 2008. You will find it here: [LINK].
The Niall Ferguson interview is still available at KGO810 radio and will be there until next Sunday morning. You can listen to it or download it. The interview is in the 3-4pm hour. Link to KGO Archives
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